Securities Transaction Tax (STT)- Features, Tax Rate & Applicability

It is quite common for taxpayers to resort to tax-evading measures to save their tax outflow to the Government. It is necessary for the Government to keep a tab on such measures by having provisions in the law or introducing new provisions / modifying the existing ones in order to curb this practice. When people started evading capital gains tax by not declaring their profits on the sale of stocks, the Finance Act, way back in 2004, introduced a tax called the Securities Transaction Tax (STT) as a clean and efficient way of collecting taxes from financial market transactions.

What is Securities Transaction Tax (STT)?

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and sale of securities that are listed on the recognised stock exchanges in India. STT is governed by the Securities Transaction Tax Act (STT Act), and the STT Act has specifically listed down various taxable securities transactions i.e., transactions on which STT is leviable.

Taxable securities include equity, derivatives, and unit of equity-oriented mutual fund. It also includes unlisted shares sold under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges. STT is an amount to be paid over and above transaction value and hence, increases transaction value.

As already mentioned, STT is leviable on taxable securities transactions. STT Act has also provided the value of the transactions on which STT is required to be paid and person who is responsible for paying STT i.e., either buyer or seller. However, rate of STT will be decided by Government and modified from time to time if necessary.

Provisions of collection of STT works similar to TCS or TDS. STT is required to be collected by a recognised stock exchange or by the prescribed person in the case of every mutual fund or the lead merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the Government on or before the 7th of the following month. In case the above persons fail to collect the taxes, they are still obliged the discharge an equivalent amount of tax to the credit of the Central Government within the 7th of the following month. Further, failure to collect or remit whatever has been collected will result in a levy of interest and penal consequences too.

Features of Securities Transaction Tax

STT is a straightforward direct tax that is simple to compute and impose. Some of STT's most distinguishing characteristics are given below.

1. An STT charge is applied on all sell transactions for options and futures.
2. For the purposes of STT computation, each ‘futures’ trade is valued at the actual traded price, whereas each option trade is valued at the premium.
3. The amount of STT that a clearing member must pay is the aggregate of all STT taxes owed by trading members under him.

Securities on which STT is Applicable

While the term ‘securities’ is not defined under the STT Act, the STT Act specifically allows borrowing of the definition of such terms not defined in the STT Act but defined in the Securities Contracts (Regulation) Act, 1956 or Income-tax Act, 1961. The term ‘Securities’ is defined in the Securities Contracts (Regulation) Act and includes the following:

• Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporates.
• Derivatives.
• Units or any other instrument issued by any collective investment scheme to the investors in such schemes.
• Government securities of equity nature.
• Equity-oriented units of mutual funds.
• Rights or interest in securities.
• Securitised debt instruments.

Hence, securities include all of the above and are traded on the recognized stock exchange for the purpose of STT levy. Off-market transactions are out of the purview of STT.

Levy of Securities Transaction Tax in India

* Please refer Rule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of taxable equity or Equity oriented mutual fund transactions.

Finance Act 2023 has made changes in STT rates as follows 

STT on Physical Delivery of Derivatives

Derivative contracts are generally settled in cash, which means, stocks are not physically delivered, and only the profits are paid and received by the contracting parties. These transactions, as given in the table above, are subject to an STT levy of 0.001 per cent. However, SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in respect of which derivative contracts would be settled by way of physical delivery of shares as against cash.  However, no clarity emerged on the rate of STT that would apply to these kinds of transactions.

Further, for such transactions, the stock exchanges began to levy an STT of 0.1 per cent (this is the rate of STT for delivery-based equity share transactions), which is almost 10 times what is levied for derivative contracts settled in cash. Hence, a petition was lodged by the Association of National Exchange Members of India (ANMI) against the stock exchanges before the Bombay High Court to address the aforementioned concern of a levy of 0.1 per cent of STT on physical delivery of derivatives.

The High Court has sought the comments of the Central Board of Direct Taxes (CBDT) in this regard. The CBDT, in response, has issued a clarification dated 27 August 2018, where it has observed that where a derivative contract is being settled by physical delivery of shares, such transaction would be similar to a transaction in equity shares where the contract is settled by actual delivery of shares. Therefore, the STT rate as applicable to delivery-based equity transactions would apply to such derivative transactions too.

Securities Transaction Tax and Income Tax

Tax on Capital Gains

When the STT levy was introduced in 2004, a new Section 10(38) was introduced to benefit taxpayers who would incur STT. As per income tax law, for transactions undertaken until 31 March 2018, any capital gain on the sale of shares or equity-oriented mutual fund units (EOMF) which are subject to STT is taxed at beneficial/Nil rate.

While long-term capital gains (if shares or EOMF are held for > 12 months) are exempt from tax, short-term capital gains on such securities are taxed at a concessional rate of 15%. The tax rate on short term gains on such securities has increased to 20% from 23rd July, 2024. However, in order to prevent abuse of exemption provisions by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions, the Finance Budget 2018 proposed to withdraw the exemption on long-term capital gain and tax long-term capital gains on equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April 2018. This tax rate was further increased to 12.5% in Budget 2024, with effect from 23rd July, 2024.

However, gains accrued till 31 January 2018 are grandfathered, i.e., in case of transfers up to 31 January 2018, the cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as of 31st January 2018.

Tax on Business Income

If a person is trading in securities and offering income/loss from such trading as business income, STT paid is allowed to be deducted as business expense.

When Is Securities Transaction Tax Levied?

Each purchase and sale of shares listed on a domestic and recognised stock market is subject to a securities transaction tax. The government determines the taxation rate. Under the STT act, all stock market transactions involving equities or equity derivatives such as futures and options are subject to taxation. When a share transaction is completed, STT is levied. As a result, STT is quick, transparent, and effective. Because the tax is imposed as soon as the transaction occurs, incidents of non-payment, incorrect payment, and so on are minimised to a bare minimum. However, the net effect is that it raises the cost of the transactions.

STT Example

Assume a dealer purchases 5000 shares worth Rs.10,000 at Rs.20 per share and sells them at Rs.30 per share. If the trader sells the shares on the same day, the intraday STT rate of 0.025% will apply.

As a result, STT = 0.025%*30*5000 = Rs.37.5.

Similarly, the appropriate STT for futures and options is 0.01%. If a trader buys 5 lots of Nifty futures at Rs.5,000 and sells them at Rs.5,010, the STT is calculated as follows:

STT = 0.01%*5010*50*5 = Rs.125.25

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